Jack Ma: The man leading the Chinese e-commerce market

Jack Ma may not be a household name in the Western world, but the company he founded, Alibaba Group, is expected to go public this summer at a valuation greater than $150 billion. The Chinese company is expected to offer $15 billion worth of shares on the New York Stock exchange, truly announcing itself globally.

With a total of 25 business units, Alibaba outsold Amazon and eBay put together in 2013, making it the fastest-growing tech company. Yahoo Inc., a large stakeholder in the company, announced that in the fourth quarter of 2013, Alibaba amassed $3.06 billion in revenue, an increase of 66 percent from the previous year. In the same quarter, net profits climbed up to $1.36 billion, more than double the year before.

No person has been more pivotal to the company’s meteoric rise than Jack Ma. The company was founded in his Hangzhou apartment in 1999 where he pulled together a group of 17 friends and students to develop alibaba.com. His vision was to build the first site that would expose China’s exporting companies and their products to global markets. As hundreds of companies enlisted on the site, Ma realised that they would pay generously for additional services, such as appearing higher in search as well as web design to make their virtual store stand out. Chinese fashion retailer, 7gege for example, spends 100,000 Yuan a day on Alibaba services, The Economist reported. Ma’s idea of an online marketplace for business was the first of its kind, and opened up China to the world of e-commerce.

Now playing the role of executive Chairman after 20 years as CEO, the man dubbed “crazy Jack” will redirect some of his efforts to solve pressing problems in his home nation. With the forthcoming IPO expected to make his net worth greater than $8 billion, he is determined to help improve the environmental situation in mainland China.

Crazy Jack

Born in 1964, Jack Ma was brought up in China’s southeastern city, Hangzhou. In 1969, after Mao’s Cultural Revolution, China began to open up to the world, both politically and economically. It was in this context that a young Jack Ma became enthused by the English language.

For nine years Ma would wake up early in the morning and ride his bike to the Hangzhou Hotel. He would befriend foreign tourists, offering his free services as a tour guide in exchange for an opportunity to practice his English. He could not have known that many years later he would speak in front of Stanford students, in well versed English, as a global business leader.

In fact, Ma failed the Chinese national university entrance exam twice, before being admitted to the Hangzhou Teachers Institute. He graduated in 1988 and became an English teacher at a local University.

Ma’s youth highlights two key assets that would go on to shape his career; his love of English and his gritty tenacity.

His skill in speaking English became important in two specific ways. In 1994, a translation project would take him to the US, where he first discovered the internet. Here, the seed was sown for an internet business.

His first attempt was to create China Pages, an online directory. This failed, and Ma began working for China’s Ministry of Foreign Trade and Economic Cooperation. There, he was called upon to give a tour to an American businessman, Yahoo’s founder and CEO, Jerry Yang. Yang’s company became an investor in Alibaba Group in 2005, buying 40% for $1 billion.

More important was Ma’s tenacity. At a time when the internet was not spoken about openly in China, Ma was forced to overcome many hurdles that an internet entrepreneur would not face in the west.

Not your average leader

Ma spent much time evangelising the use of the internet, proclaiming its benefits for businesses at trade shows across China. (By comparison, around the same time two Stanford students, Larry and Sergey, had been working on a university project for two years that would become Google). He later said: “I felt lonely when I started working in the internet business in China, no one believed in me.” But even after the failure of China Pages, Ma was able to rouse a team to build his vision, proclaiming “Chinese brains are just as good as theirs (Americans) and this is the reason we dare to compete with Americans.”

His ability to galvanise his colleagues behind a common goal, is one of his remarkable traits as a business leader. Indeed, it was his leadership and vision that would dictate the success of Alibaba Group. In October 1999, Goldman Sachs and Japan’s Softbank invested $5 million and $20 million respectively. By 2000, Jack Ma was on the front cover of Forbes magazine, the first ever mainland Chinese citizen to do so.

Over the years he became well known for his bold and swift decision making. When it was found that the CEO and COO of alibaba.com had been suspected of fraudulent activity (aiding counterfeit gold producers on to the platform) his action was fast and definitive; both David Wei and Elvis Lee resigned from their posts. Ma wrote of the incident in a letter to employees, “Only through holding onto our ideals and our principles will we be able to become the pride of this era!”

He has also approached business problems with less orthodox approaches. Last September, Alibaba launched chat app Laiwang. After reaching only 10 million users, in April this year Ma sent a note to all employees stating that if they did not bring 100 new users to the app each, they would not receive their new year’s bonus.

In fact, Ma has never been concerned with being an orthodox leader. At an Alibaba celebration this year, he emerged from a stage dressed as a rock star to sing “Can you feel the love tonight” to a crowd of his Alibaba employees.

Taking down eBay

Ma’s leadership style was perhaps best personified when he went head-to-head with US tech giant eBay. As eBay announced plans to expand in China, Ma told his “comrades” they would develop a competitor. In 2003, Alibaba launched its consumer-to-consumer marketplace, Taobao. In a publicity stunt, Ma had the Alibaba team dress in Army apparel to publicly announce war on eBay.

With 80% of the market at the time, eBay looked to be in a healthy position. Ma had greater insight into the Chinese e-commerce market however, and believed he could position Taobao to better suit Chinese people. He declared: “eBay is a shark in the ocean; we are a crocodile in the Yangtze River. If we fight in the ocean, we will lose, but in the river, we will win.”

His first move was to announce that all buyers and sellers could use Taobao for free, for the first three years. By removing the barrier to use the platform they were able to attract users. The second move was to build in features which would gain user trust, crucial for many Chinese who were using such a platform for the first time. Taobao provided third party vetting on products and developed their own payments system, Alipay, to handle commission free transactions.

In its first two years of operation, it became clear that Taobao was beginning to claim eBay customers. By 2007, Taobao had outgrown eBay in China, claiming 84% of consumer e-commerce. More than 600 million accounts exist on the platform with around 100 million shoppers active a day.

The Alibaba Group’s model relies on explosively expanding, dominating a market at a loss, before making a return on the additional services. The original alibaba.com only became profitable in 2002, after three years of operation. Similarly, Taobao effectively forced eBay out the market but only broke even 6 years after launch.

This highlights a key difference to competitors like Amazon, who actually own some of the products they sell. In 2013, Amazon had revenues of $74.5 billion, whilst Alibaba’s revenues where just over 10% of that. Alibaba’s role is limited to helpful middleman.

Chinese e-commerce market

McKinsey Global Institute estimates that in China 90% of online commerce occurs in market places, such as Alibaba’s Taobao or Tmall. Those sites together facilitated $170 billion worth of transactions in 2013, according to The Economist.

In the US market however, 76% of commerce is held directly between consumers and an individual merchant. In this context, brands can successfully host their own online store for commerce, and forgo the additional services that Alibaba profit from in a marketplace scenario.

As Alibaba nears IPO, many investors are weighing up the sustainability of its growth. Much of the growth opportunity remains in China. In 2013, China overtook the USA as the largest e-commerce market, surpassing $283 billion. Since 2003, Chinese e-commerce has grown 120% year on year and The Economist estimates that the market will near $450 billion by the end of 2015.

Competition is also increasing however, and Jack Ma’s successor as CEO, Jonathan Lu, will need to be aware of the threat posed by Tencent Holdings Ltd. Tencent are the creators of China’s most popular instant messaging app, WeChat. They have begun to allow commerce through the app and profit from charging a fee.

They have also begun to compete with Alibaba more directly. In 2005, Tencent launched PaiPai, which has struggled to compete with Taobao and by mid-2013 had less than 5% of the consumer-to-consumer market. In early 2014 however, Tencent bought a 15% stake in JD.com, the second largest business-to-consumer marketplace behind Tmall.

The partnership is strategically important, as it means Tencent now operate in both the key e-commerce markets that Alibaba dominate. Crucially though, they have access to a growing mobile audience, in excess of 350 million users from which they can drive further e-commerce.

In a typically bold manner, Alibaba has responded to this mobile threat through a series of acquisitions and investments. Like a general looking to expand his fleet, it was reported that Ma sent an internal memo to his engineering team asking what companies they should buy in the mobile space.

The expansion plan

Alibaba led the series D funding in mobile messaging app Tango, investing $215 million and also acquired China’s top digital mapping solution AutoNavi. They were also part of a new investment round for the popular US car-pooling app, Lyft. Other acquisitions include a media company and a department store operator.

Ma has already described plans to expand in other sectors, particularly finance. The Financial Times reported Ma to say, “Just as the internet has revolutionised retail, we believe it will eventually do the same to fundamentally information driven industries, such as finance, healthcare and education.”

For the past few years, Alibaba has been leveraging data it collects from its e-commerce business, to guide decisions in making small loans to merchants. Joe Tsai, the company’s executive Vice Chairman, told The Economist he expected their loan book would top $2 billion by the end of 2013. With typical loans averaging $8,000, they target people who are off the radar of China’s large state banks. The non-performing loan ration is reported to be less than 2%.

It is this ability to sense opportunities in China that makes Jack Ma so valuable to Alibaba Group. It may therefore be a disappointment for potential investors that he will now be dividing his attentions elsewhere.

New China, New Jack

As China has maintained double digit growth for the last three decades, few people have embodied the new China as much as Jack Ma. It is commonly thought that behind key figures in China’s Communist Party, Jack Ma is one of the most powerful men in the world’s second largest economy.

It is fitting then, that as China comes under increasing pressure to address environmental concerns, so should Jack Ma step down as CEO in order to help China’s condition. His concerns include air pollution, food safety and water purity. In early April, Bloomberg reported that water testing kits were being sold through Alibaba so that Chinese citizens could volunteer to measure freshwater sources as part of a government initiative.

As Jack Ma looks to build a social legacy in China, he will hope that enough of his fighting spirit has been instilled in the company he founded more than 20 years ago.

With Tencent’s mobile artillery poised to attack, the man voted Person of the Year in 2013 by the Financial Times, will see his company go into battle once again. In comparison to eBay, Tencent doesn’t carry the disadvantage of being a foreign incumbent.

More than ever, Alibaba must draw upon the endeavours best represented by their executive Chairman: vision, drive and tenacity. Should they arise from battle victorious once again, this time with public funding, Ma would see his crocodile in the Yangtze graduate to shark in the Ocean.